European power prices surged to a fresh record this week as natural gas extended gains, deepening the energy crunch that’s threatening to plunge the region into a recession.
The demand for power generation is growing due to heatwaves in many parts of Europe, leading to a surge in natural gas prices.
Germany’s next-year electricity rate was trading at about 477.50 euros a megawatt-hour on the European Energy Exchange AG – a six-fold jump over the past year, with the price doubling in the last two months alone.
In this article
- Scramble for gas
- Fuelling inflation
- Impact on industries
- Water level running low
- Winter is coming
- Dependency on Russian gas
- "Serious risk" of an energy crunch
Scramble for gas
Europe has been experiencing dwindling imports of gas from Russia, which was until recently its biggest supplier by far.
Moscow has cut supplies through the Nord Stream pipeline by 80% to punish Germany and the rest of Europe for supporting Ukraine.
Meanwhile, high temperatures have fuelled gas demand in Europe and North Asia, pushing utilities in the two regions to compete for a limited supply of tankers carrying LNG (liquefied natural gas), driving prices higher.
The impact has also been felt in the US, where exports to Europe have kept domestic supplies lean, pushing natural-gas futures this week to US$9.329 per million British thermal units, the highest price in 14 years and a 150% gain in one year.
Fuelling inflation
The gas futures price in the Netherlands (Dutch TTF), the benchmark in northwest Europe, rose 3.2% this week to €233.56 a megawatt-hour.
This is higher than the previous record set on March 7, shortly after Russia invaded Ukraine.
Power prices are surging too, as they are dictated by the price of electricity-generating gas.
These rising energy prices are feeding through to household bills, pushing consumer-price inflation into double-digit territory.
Energy prices are rising across Europe with no end in sight, as the latest figures from Europe’s official statistics agency show. Energy annual inflation in the EU reached 41.1% last month, up 14.1 percentage points since the start of this year. pic.twitter.com/CSUXs3S0Ud
— Win Smart, CFA (@WinfieldSmart) August 17, 2022
Impact on industries
High electricity costs are also taking a toll on energy-intensive industries.
Zinc producer Nyrstar NV said this week that it would idle its Dutch smelting operations starting September 1.
The company’s electricity costs have gone up by a factor of about 10 and it has struggled to pass them on in the form of higher zinc prices, The Wall Street Journal reported.
If only Europe had a closer energy-producing ally that could provide them with reliable and responsible gas... ???? https://t.co/4vt0x80HPI
— Brock W. Harrison (@BrockWHarrison) August 16, 2022
European governments are looking at ways to ease the pain and impact that surging energy costs are having on economies.
The bloc has embarked on a plan to conserve gas for the winter, fearing President Vladimir Putin could order a full cut-off.
Germany plans to postpone the closure of its final three nuclear power plants – pausing a two-decade policy of ditching nuclear power, The Wall Street Journal reported.
But in France, EDF (Électricité de France) had to significantly reduce the capacity utilisation rate of its nuclear power plants because droughts have reduced water availability for cooling the reactors.
Water level running low
The surge in gas prices is also driven by disruption to the supply of coal and petroleum on the Rhine River – a key waterway for barge transportation.
Germany's economy relies on this crucial shipping corridor, but when the water level is critically low, shippers simply cannot load the usual volume of cargo.
This has led to higher gas prices as coal and other commodities are reaching their destinations in smaller quantities and more slowly.
Germany ???????? is headed for a catastrophe over the coming years. Russian gas for delivery to the German border is priced over $50/M which is up 25X from mid 2020. Germans might see $100/M this winter. #Germany #Gasageddon #OOTT pic.twitter.com/JkqpBcuq9G
— ????????Kyle Bass???????? (@Jkylebass) August 17, 2022
Winter is coming
The European energy market is being driven by concerns over whether its tight gas supplies will be able to generate enough electricity this winter.
Elevated energy costs throughout Europe are raising risks of gas rationing and blackouts in the winter when demand peaks.
Although European countries are trying to stockpile natural gas for winter heating, an ongoing heatwave means demand for the fuel now to generate electricity.
In the UK, the household energy price cap is expected to almost double at the start of October.
The wholesale price of UK electricity for that month has jumped about sevenfold in the past year to roughly £591 ($713) a megawatt-hour on the Intercontinental Exchange AG.
Dependency on Russian gas
Russia’s aim in cutting gas supplies to Europe, analysts say, is to cause so much economic harm that support for Ukraine wanes.
Europe has become increasingly dependent on Russian gas in recent decades as it moved away from coal while reducing domestic gas production in the Netherlands and North Sea.
Economies in Central and Eastern Europe that rely on Russian oil and gas are the most exposed in the region.
Moody’s Investors Service recently changed the outlook for the Czech government’s credit rating to negative from stable.
It said the risk of prolonged gas-supply disruptions from Russia could lead to rationing and a deep recession.
"Serious risk" of an energy crunch
The European Commission has set a target of filling gas storage caverns up to 80% capacity by October 1.
Member-states are on track to hit this target, but it has come at a cost – the EU's gas bill this year is 10 times higher than usual, at over US$51 billion, according to oilprice.com.
Furthermore, storage alone won’t keep the EU going through the winter months. European economies will need more gas as a regular supply.
This could be why the head of the German energy regulator warned that the country must cut its gas use by a fifth if it wants to prevent an energy shortage this winter.
If it fails to reach 20% gas savings, Germany is at "serious risk" of an energy crunch, Klaus Müller, head of the federal network agency (BNA), told the Financial Times last week.
Russia’s Gazprom also warned on Tuesday that gas prices could rise further.
"European spot gas prices have reached US$2,500 (per 1,000 cubic metres). According to conservative estimates, if such a tendency persists, prices will exceed US$4,000 per 1,000 cubic meters this winter," Gazprom said.